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ICI RESEARCH

PERSPECTIVEMAY 2021 // VOL. 27, NO. 5

The Closed-End Fund Market, 2020

KEY FINDINGS

» Total closed-end fund assets were $279 billion at year-end 2020. Total assets were unchanged from their level at year-end 2019 as financial markets steadily recovered from their sharp downturn in February and March 2020.

» The share of assets in bond closed-end funds was 62 percent of all closed-end fund assets at year-end 2020, compared with 60 percent at year-end 2010. This share has remained relatively stable over the past decade as net issuance to bond closed-end funds has offset total returns of US stocks.

» Price deviations from net asset values on closed-end funds widened in 2020. The average discount for equity closed-end funds widened from 6.8 percent at year-end 2019 to 10.2 percent at year-end 2020. The average discount for bond closed-end funds widened from 2.8 percent at year-end 2019 to 4.4 percent by year-end 2020.

» Overall investor demand for closed-end fund shares declined in 2020. Net issuance of closed-end fund shares was $1.5 billion in 2020 compared with $5.9 billion in 2019.

» Competitive dynamics have prevented any single closed-end fund sponsor from dominating the closed-end fund market. At year-end 2020, there were 91 closed-end fund sponsors competing in the US market.

» Nearly 64 percent of closed-end funds employed structural leverage, portfolio leverage, or both in 2020. Closed-end funds had $50.6 billion outstanding in preferred shares and other structural leverage at year-end 2020. Portfolio leverage consisting of reverse repurchase agreements and tender option bonds amounted to $21.4 billion.

» Closed-end fund investors tended to have above-average household incomes and financial assets. An estimated 3.9 million US households held closed-end funds in 2020. These households tended to include affluent investors who owned a range of equity and fixed-income investments.

2 ICI RESEARCH PERSPECTIVE, VOL. 27, NO. 5 // MAY 2021

What Is a Closed-End Fund?Closed-end funds are one of four main types of investment companies registered under the Investment Company Act of 1940, along with mutual funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Closed-end funds generally issue a fixed number of shares that are listed on a stock exchange or traded in the over-the-counter market.1 The assets of a closed-end fund are professionally managed in accordance with the fund’s investment objectives and policies and may be invested in stocks, bonds, and other assets. The market price of a closed-end fund fluctuates like that of other publicly traded securities and is determined by supply and demand in the marketplace.

A closed-end fund is created by issuing a fixed number of common shares to investors during an initial public offering. Subsequent issuance of common shares can occur through secondary or follow-on offerings, at-the-market offerings, rights offerings, or dividend reinvestments. Closed-end funds are also permitted to issue one class of preferred shares in addition to common shares. Holders of preferred shares are paid dividends but do not participate in the gains and losses on the fundʼs investments.2 Issuing preferred shares allows a closed-end fund to raise additional capital, which it can use to purchase more assets for its portfolio.

What’s Inside

James Duvall, economist, prepared this report. Alex Johnson, ICI senior research assistant, provided assistance.

Suggested citation: Duvall, James. 2021. “The Closed-End Fund Market, 2020.” ICI Research Perspective 27, no. 5 (May). Available at www.ici.org/pdf/per27-05.pdf.

For a complete set of data files for each figure in this report, see www.ici.org/info/per27-05_data.xlsx.

The following, unless otherwise specified, apply to all data in this report: (1) funds of funds are excluded from the data to avoid double counting, and (2) dollars and percentages may not add to the totals presented because of rounding

2 What Is a Closed-End Fund?

3 Closed-End Fund Pricing

7 Assets in Closed-End Funds

9 Net Issuance of Closed-End Funds

10 Competition in the Closed-End Fund Industry

12 Closed-End Fund Distributions

14 Closed-End Fund Leverage

18 Characteristics of Closed-End Fund Investors

21 Notes

23 References

ICI RESEARCH PERSPECTIVE, VOL. 27, NO. 5 // MAY 2021 3

Some closed-end funds may adopt stock repurchase programs or periodically tender for shares; however, once issued, shares of a closed-end fund generally are not purchased or redeemed directly by the fund. Rather, shares are bought and sold by investors in the open market. Because a closed-end fund does not need to maintain cash reserves or sell securities to meet redemptions, the fund has the flexibility to invest in less-liquid portfolio securities. For example, a closed-end fund may invest in securities of very small companies, municipal bonds that are not widely traded, or securities traded in countries that do not have fully developed securities markets.

Closed-End Fund PricingMore than 95 percent of exchange-listed closed-end funds calculate the value of their portfolios every business day, while others calculate their portfolio values weekly or on some other basis. The net asset value (NAV) of a closed-end fund is calculated by subtracting the fund’s liabilities (e.g., fund expenses) from the current market value of its assets and dividing by the total number of shares outstanding. The NAV changes as the total value of the underlying portfolio securities rises or falls, or the fund’s liabilities change.

Because an exchange-listed closed-end fund’s shares trade based on investor demand, the fund may trade at a price higher or lower than its NAV. A closed-end fund trading at a share price higher than its NAV is said to be trading at a “premium” to the NAV, while a closed-end fund trading at a share price lower than its NAV is said to be trading at a “discount.” Funds

may trade at premiums or discounts to the NAV based on market perceptions or investor sentiment.3 For example, a closed-end fund that invests in securities that are anticipated to generate above-average future returns and are difficult for retail investors to obtain directly may trade at a premium because of a high level of market interest. In contrast, a closed-end fund with large unrealized capital gains may trade at a discount because investors will have priced in any perceived tax liability.

Closed-end fund price deviations widened sharply in February and March 2020 as COVID-19 developments began to affect financial markets. For equity closed-end funds, the average discount widened from 5.3 percent at the end of January 2020 to 10.9 percent at the end of March 2020, while bond closed-end fund average discounts widened from 2.5 percent to 7.1 percent over the same period (Figure 1, top panel). The average discount for equity closed-end funds continued to widen through October 2020 to 13.6 percent—despite generally steady growth in the equity markets. This is likely the result of uncertainty over the duration of the recovery period, as countries worldwide began to experience a second spike in the number of COVID-19 cases. Meanwhile, the average discount for bond closed-end funds remained relatively stable, with an average discount of 7.2 percent at the end of October 2020. By the end of December 2020, average discounts for equity and bond closed-end funds narrowed to 10.2 percent and 4.4 percent, respectively, as positive reports from vaccine trials likely improved investor perceptions of the market.


FIGURE 1Closed-End Fundsʼ Premium/Discount Rate Percent, month-end

-20

-15

-10

-5

0

5

0

20

40

60

80

100

20202019201720152013201120092007200520032001199919971995

20202019201720152013201120092007200520032001199919971995

EquityBond

EquityBond

Majority of Closed-End Funds Generally Trade at a DiscountPercentage of total closed-end funds trading at a discount, month-end

Note: The premium/discount rate is the simple average of the percent difference between the share price and NAV at month-end.Source: Investment Company Institute tabulations of Bloomberg data

The majority of closed-end funds trade at a discount in any given month (Figure 1, bottom panel). Between 1995 and 2020, the percentage of equity closed-end funds trading at a discount ranged between 53 percent and

93 percent of funds and averaged 80 percent. Over the same period, the percentage of bond closed-end funds trading at a discount ranged between 29 percent and 96 percent and averaged 74 percent.


Shareholder Activism

The persistence and prevalence of discounts (see Figure 1 on page 4)—in combination with trading on the secondary market—provide closed-end fund shareholders the ability to realize gains through changes in the fund’s market price. For example, if a closed-end fund is trading at a discount and a shareholder expects that discount to narrow over some period, then the shareholder may attempt to capture a gain by buying the shares of the closed-end fund at the lower price with the intent of selling them at a higher price in the future.

Closed-end funds can also conduct certain liquidity events to provide shareholders with the difference between the fund’s market price and its NAV. Closed-end funds may repurchase shares at, or close to, NAV through share repurchases or tender offers. Additionally, if a closed-end fund liquidates, then shareholders will receive a cash distribution equal to NAV for all common shares; and if a closed-end fund converts to (or merges with) an open-end fund, then shareholders will have the option to redeem their shares at NAV. The availability of these liquidity events makes closed-end funds susceptible to activist shareholders—shareholders whose primary objective is to capture short-term profits by purchasing a stake in a fund at a discount and using their voting power to have the fund take an action that results in one of these liquidity events.

How Prevalent Are Activist Shareholders in the Closed-End Fund Market?Shareholder activism is increasingly prominent in the closed-end fund market. Over the past five years, the number of beneficial ownership and contested proxy solicitation filings indicating activist shareholder activity more than doubled from the number of similar filings between 1996 and 2000. This increase occurred despite approximately the same number of closed-end funds in both periods.

The Securities and Exchange Commission (SEC) requires any person (or group of persons) who directly or indirectly acquires or has beneficial ownership of more than 5 percent of a class of a fund’s securities to file beneficial ownership reports on Schedule 13D or the more-abbreviated Schedule 13G. Investors holding more than 5 percent and less than 20 percent who have the intent of changing or influencing control of the fund must file Schedule 13D. Investors who own 20 percent or more—regardless of intent—also must file Schedule 13D. Passive investors who own more than 5 percent but less than 20 percent and claim to have no activist intent may file Schedule 13G. Investors must file Schedules 13D or 13G within 10 days of the date on which they exceed the 5 percent ownership threshold. Filers must amend Schedule 13D and 13G

Continued on the next page


filings continuously. Additionally, the SEC requires any challenging shareholder that solicits votes for its own board candidates and proposals to file a contested proxy solicitation on Schedule 14A.

Figure 2 groups the total number of these filings4 into five periods between 1996 and 2020.5

During the 1996–2000 period, there were 71 beneficial ownership and related contested proxy solicitation filings, compared with 155 from 2016 through 2020. Sometimes the same activist shareholder(s) made filings regarding the same fund in successive years, or different activist shareholders each made filings in the same year with respect to the same fund. Among distinct closed-end funds with beneficial ownership and contested

proxy solicitation filings, activist shareholders targeted 54 closed-end funds between 1996 and 2000 compared with 115 between 2016 and 2020. While the number of closed-end funds with activist shareholder involvement has increased between the two periods, it is important to note that this difference is not a function of the number of funds available to investors. At year-end 2000, there were 482 exchange-listed closed-end funds, almost the same as the 484 exchange-listed closed-end funds at year-end 2020.

For more information on shareholder activism and the defenses closed-end funds have available to manage activist shareholder involvement, see “Recommendations Regarding the Availability of Closed-End Fund Takeover Defenses” at www.ici.org/pdf/20_ltr_cef.pdf.

FIGURE 2Activist Shareholder Involvement in Closed-End Funds Has Steadily Grown

Period Number of filings

Number of distinct closed-end funds

with filings

Five activist shareholders with most filings

Percentage of filings1996–2000 71 54 61%2001–2005 96 57 612006–2010 145 115 852011–2015 112 89 762016–2020 155 115 79

Memo:Number of exchange-listed closed-end funds at year-end 2000: 482

Number of exchange-listed closed-end funds at year-end 2020: 484

Note: Filings include Schedule 13D and Schedule 14A (PREC14A) submissions. Data include only traditional exchange-listed closed-end funds.Source: Investment Company Institute tabulations of SEC EDGAR data

Shareholder Activism CONTINUED

Continued from the previous page

https://www.ici.org/pdf/20_ltr_cef.pdf

https://www.ici.org/pdf/20_ltr_cef.pdf


Assets in Closed-End FundsAt year-end 2020, 494 closed-end funds had total assets6 of $279 billion (Figure 3)—unchanged from year-end 2019. Stock and bond markets sharply declined in February and March 2020 because of the uncertainty surrounding the COVID-19 pandemic. This contributed to a decline in total assets of closed-end funds from $279 billion at year-end 2019 to $231 billion by the end of March 2020. However,

markets steadily recovered for the remainder of the year, helping lift closed-end fund assets back to their precrisis levels. In particular, between April 1, 2020, and December 31, 2020, total returns on US stocks were 52.3 percent, total returns on international stocks were 44.8 percent, total returns on US investment grade bonds were 4.4 percent, and total returns on US municipal bonds were 5.9 percent.7

FIGURE 3Total Assets of Closed-End Funds Were $279 Billion at Year-End 2020Billions of dollars, year-end

20202019201820172016201520142013201220112010

501504532534561570601604634626 494

282 292263 265 277

252279

265244239

279

Number of closed-end funds

Note: Total assets is the fair value of assets held in closed-end fund portfolios funded by common and preferred shares less any liabilities (not including liabilities attributed to preferred shares).Source: Investment Company Institute


Historically, bond funds have accounted for a large share of assets in closed-end funds. At year-end 2010, 60 percent of all closed-end fund assets were held in bond funds, with the remainder held in equity funds (Figure 4). A decade later, assets in bond closed-end funds were $173 billion, or 62 percent of closed-end fund assets, and assets in equity closed-end funds

totaled $106 billion, or 38 percent of closed-end fund assets. These shares have remained relatively stable, in part because of two offsetting factors. Over the past 10 years, cumulative net issuance of bond closed-end fund shares exceeded that of equity fund shares—offsetting the total returns of US stocks,8 which exceeded those of US bonds during this time.9

FIGURE 4Composition of the Closed-End Fund Market by Investment Objective Percentage of closed-end fund total assets, year-end

20202010

$279 billion$239 billionTotal assets

Global/International bondDomestic municipal bondDomestic taxable bondGlobal/International equityDomestic equity

6

28

11

20

34

8

32

21

15

25

Source: Investment Company Institute


Net Issuance of Closed-End FundsNet issuance of closed-end fund shares was $1.5 billion in 2020, compared with $5.9 billion in 2019 (Figure 5). Investor demand for closed-end funds declined in 2020 and was concentrated in domestic equity closed-end funds in the first quarter of the year.

Equity closed-end funds had positive net issuance of $1.9 billion in 2020, with net issuance of $2.0 billion in domestic equity funds slightly offset by net redemptions of $76 million in global/international equity funds. The net issuance of domestic equity closed-end funds was concentrated in the first quarter of 2020. This largely occurred prior to the COVID-19 crisis in February and March, as demand for equity closed-end funds was likely attributable to continued positive returns in the US stock market in January. For the remaining three quarters of the year, net issuance of domestic equity closed-end funds was just $44 million.

Bond closed-end funds had net redemptions of $439 million in 2020—with net redemptions of $715 million coming from domestic taxable bond funds; net redemptions of $316 million coming from domestic municipal bond funds; and net issuance of $593 million coming from global/international bond funds. Bond closed-end funds had net issuance of $887 million in the first quarter of 2020, the vast majority of which occurred prior to the start of the COVID-19 crisis (similar to equity closed-end funds). For the rest of 2020, bond closed-end funds experienced net redemptions of $1.3 billion. Demand for bond closed-end funds has historically been positive because of their ability to invest in less-liquid securities, which helps boost the income yield that the closed-end funds can generate and distribute to investors in comparison to other fund products. However, investors generally sought to preserve and bolster their liquidity in 2020, which may have contributed to lower demand for bond closed-end funds.

FIGURE 5Closed-End Fund Net Share IssuanceMillions of dollars

Year Total

Equity Bond

Total DomesticGlobal/

International Total Domestic taxable

Domestic municipal

Global/International

2011 6,018 4,466 3,206 1,260 1,551 724 825 22012 11,385 2,953 2,840 113 8,432 3,249 3,102 2,0812013 14,515 3,605 4,097 -491 10,909 3,921 530 6,4592014 4,935 4,314 3,819 494 621 266 567 -2122015 1,859 1,267 224 1,043 592 708 -11 -1042016 829 58 242 -184 771 1,437 -168 -4982017 678 -548 -147 -401 1,226 758 231 2372018 1,869 -412 -352 -60 2,280 300 1,985 -42019 5,882 2,633 828 1,805 3,249 1,311 1,674 2652020 1,462 1,901 1,977 -76 -439 -715 -316 593

Note: Net share issuance is the dollar value of gross issuance (proceeds from initial and additional public offerings of shares) minus gross redemptions of shares (share repurchases and fund liquidations).Source: Investment Company Institute


Competition in the Closed-End Fund IndustryAt year-end 2020, there were 91 closed-end fund sponsors competing in the US market (Figure 6), compared with 92 closed-end fund sponsors at year-end 2019. Overall, in the past decade, 31 closed-end fund sponsors left the business while 29 firms entered.

Competitive dynamics have prevented any single sponsor or group of sponsors from dominating the closed-end fund market. For example, in 2020, only 10 sponsors offered more than 10 closed-end funds, whereas 40 sponsors offered only one closed-end fund, and 31 sponsors offered two to five closed-end funds (Figure 7). The share of assets managed by the largest 25 complexes in 2020 (87 percent) is slightly higher than in 2010 (85 percent),10 and of the largest 25 closed-end fund complexes in 2010, only 16 remained in this group at year-end 2020. In addition, the 494 closed-end funds must compete with other registered investment

companies—more than 9,000 mutual funds, more than 4,300 UITs, and nearly 2,300 ETFs.11

Competitive dynamics also affect the number of closed-end funds offered in any given year. In particular, closed-end fund sponsors launch new closed-end funds to meet investor demand, and they merge or liquidate closed-end funds that do not attract sufficient investor interest. In recent years, closed-end fund sponsors have also merged funds with similar strategies to improve trading efficiency. Consequently, the number of closed-end funds available to investors has declined steadily since 2011. From 2012 through 2019, more closed-end funds were liquidated, and others converted into open-end mutual funds or ETFs, than new closed-end funds were launched. In 2020, 14 closed-end funds were launched compared with 21 in 2019, while the number of closed-end fund mergers and liquidations was 13 in 2020 compared with 25 in 2019 (Figure 8).

FIGURE 6Number of Closed-End Fund SponsorsEntry, exit, and total number of closed-end fund sponsors

0

5

10

15

20

20202019201820172016201520142013201220110

25

50

75

100

125

4

12

433

54

21

45

1

55

23

1

32

929296959698979592 91

Total number of closed-end fund sponsors at year-end (right axis)Closed-end fund sponsors entering (left axis)Closed-end fund sponsors exiting (left axis)



FIGURE 7Distribution of Closed-End Funds Across SponsorsNumber of fund sponsors, year-end 2020

16+11 to 156 to 102 to 51

10

37

31

40


Share of Closed-End Fund Assets at Largest ComplexesPercentage of total closed-end fund assets, year-end

2010 2012 2014 2016 2018 2019 2020Largest 5 complexes 51 54 50 52 53 54 56Largest 10 complexes 64 66 63 66 66 67 71Largest 25 complexes 85 86 83 83 84 85 87


FIGURE 8Number of Closed-End Funds Entering and Exiting the Industry

2015

15

7

12

19

2016

14

7

23

30

2017

22

8

513

2018

19

34

22

12

2019

2125

14

11

2020

14

8

513

2011

21

10

11

12012

52

26

36

16

2013

27 26

23

32014

38

42

4

17


Launched closed-end fundsMerged closed-end fundsLiquidated closed-end funds

Note: Data include closed-end funds that do not report statistical information to the Investment Company Institute and closed-end funds that invest primarily in other closed-end funds. Source: Investment Company Institute


Other measures also indicate that no one firm or group of firms dominates the closed-end fund market. One such measure of market concentration is the Herfindahl-Hirschman Index, which weighs both the number and the relative size of firms in the industry.12 Index numbers smaller than 1,000 indicate that an industry is unconcentrated, index numbers between 1,000 and 1,800 indicate moderate concentration, and index numbers greater than 1,800 indicate that an industry is highly concentrated. At year-end 2020, the closed-end fund industry had a Herfindahl-Hirschman Index number of 921 (Figure 9).13

Closed-End Fund DistributionsIn 2020, closed-end funds distributed an estimated $16.4 billion to shareholders (Figure 10). Closed-end funds may make distributions to shareholders from three possible sources: income from interest and dividends, realized capital gains, and return of capital. Income from interest and dividends made up an estimated 71 percent of closed-end fund distributions in 2020. Capital gains accounted for an estimated 9 percent of closed-end fund distributions, and return of capital accounted for an estimated 20 percent.

FIGURE 9Closed-End Fund Industry Found CompetitiveHerfindahl-Hirschman Index,* year-end

20202019201820172016201520142013201220112010

868902816814814

719712802788758

921

* The Herfindahl-Hirschman Index weighs both the number and relative size of firms in the industry to measure competition. Index numbers less than 1,000 indicate that an industry is unconcentrated.Source: Investment Company Institute

FIGURE 10Closed-End Fund DistributionsPercentage of closed-end fund distributions, 2020

20%Return of capital

71%Income distributions*

9%Capital gains distributions

Total closed-end fund distributions: $16.4 billion

* Income distributions are paid from interest and dividends that the fund earns on its investments in securities.Source: Investment Company Institute


Some closed-end funds follow a managed distribution policy, which allows them to provide predictable, but not guaranteed, cash flow to common shareholders. The goal of a managed distribution policy is to reduce the uncertainty regarding future cash flows for common shareholders. The payment from a managed distribution policy is typically paid to common shareholders on a monthly or quarterly basis and can be a regular fixed cash payment or an amount based on a percentage of a fund’s assets.14 Managed distribution policies are used most often in multi-strategy or equity-based closed-end funds where capital appreciation is an important part of a fund’s expected total return.15

Closed-end fund managed distribution policies may have potential advantages for common shareholders. First, a closed-end fund with a managed distribution policy can be an important tool for investors seeking steady income or cash flow. Second, a managed distribution policy permits a fund to offer regular cash flow from strategies not typically associated with regular income. Third, having a managed distribution policy in place may help support the fund’s share price and may help reduce any discount between the closed-end fund’s share price and its NAV.16

Closed-end fund managed distribution policies may also have disadvantages for common shareholders. Regular distributions provide common shareholders with predictable cash inflows but also result in consistent cash outflows from the fund. This reduces the amount of assets available for investment by a fund’s adviser and may cause a fund to hold a larger cash position than otherwise necessary in order to pay regular distributions. In addition, if a closed-end fund

consistently pays distributions that are greater than the fund’s total return, a portion of the distributions will be made from a return of capital, and the fund eventually will deplete its capital.17

Return of capital distributions from closed-end funds may result from unrealized capital gains, pass-through return of capital from underlying holdings, or just the return of investors’ own capital. In order to avoid selling securities that are expected to continue to appreciate, a closed-end fund may use cash holdings to pay a distribution based on the expected capital gains. In this scenario, the fund’s total return would exceed the distribution rate if the expected gains were realized.

Certain types of portfolio securities, such as master limited partnerships (MLPs), generate return of capital through their ordinary business operations. MLPs generally do not pay taxes as they pass through income and gains to investors. MLPs pay distributions based on their cash flow, but, because MLPs tend to be focused on energy-related operations, they typically have large depreciation and amortization costs that offset the income. Therefore, the cash that is generated from operations is issued as a return of capital from the MLP, and a closed-end fund holding these types of securities must pass through the return of capital to its shareholders.18

When a closed-end fund maintains a distribution rate that exceeds income generated from interest income, dividends, and capital gains, then the excess will result in a return of the investors’ own capital, which will decrease the assets available to the fund to generate income.


Closed-End Fund LeverageClosed-end funds have the ability, subject to strict regulatory limits, to use leverage as part of their investment strategy.19 The use of leverage by a closed-end fund can enable it to achieve higher long-term returns but also increases risk and the likelihood of share price volatility. Closed-end fund leverage can

be classified as either structural leverage or portfolio leverage. At year-end 2020, at least 315 funds—nearly 64 percent of closed-end funds—were using structural leverage, portfolio leverage consisting of tender option bonds or reverse repurchase agreements, or both (Figure 11).20

FIGURE 11Closed-End Funds Are Employing Structural and Some Types of Portfolio LeverageNumber of funds, end of period

2020:Q42020:Q32020:Q22020:Q1201920182017

318318314322331343315

278276273278281305

274

148148145149156154 150

Total1Structural2Portfolio3

1 Components do not add to the total because funds may employ both structural and portfolio leverage. 2 Structural leverage affects the closed-end fund’s capital structure by increasing the fund’s portfolio assets through borrowing capital

and issuing debt and preferred shares.3 Portfolio leverage is leverage that results from particular types of portfolio investments, including certain types of derivatives, reverse

repurchase agreements, tender option bonds, and other investments or types of transactions. Data are only available for reverse repurchase agreements and tender option bonds. Given data collection constraints, and the continuing development of types of investments/transactions with a leverage characteristic (and the use of different definitions of leverage), actual portfolio leverage may be materially different from what is reflected above. Source: Investment Company Institute


Structural LeverageStructural leverage, the most common type of leverage used by closed-end funds, affects the closed-end fund’s capital structure by increasing the fund’s portfolio assets. Types of closed-end fund structural leverage include borrowing capital and issuing debt and preferred shares.21 Closed-end funds are subject to asset coverage requirements if they issue debt or preferred shares. For each $1.00 of debt issued, the fund must have $3.00 of assets immediately after issuance and at the time of dividend declarations (commonly referred to as 33 percent leverage). Similarly, for each $1.00 of preferred stock issued, the fund must have $2.00 of assets immediately after issuance and at the time of dividend declaration dates (commonly referred to as 50 percent leverage).

At the end of 2020, 274 funds had a total of $50.6 billion in structural leverage, with the majority (56 percent) of those assets from preferred shares (Figure 12); 44 percent came from other types of structural leverage. The average leverage ratio22

across those closed-end funds employing structural leverage was 26 percent at year-end 2020. Among closed-end funds employing structural leverage, the average leverage ratio for bond funds was somewhat higher (28 percent) than that of equity funds (21 percent).

At year-end 2020, 10 percent of the $279 billion in closed-end fund total assets was funded by proceeds from preferred shares, with bond funds accounting for 93 percent of outstanding preferred share assets (Figure 13). The dollar amount of outstanding closed-end fund preferred shares has declined since auction market preferred stock, once a common type of preferred share, suffered a liquidity crisis in mid-February 2008.23 Since then, closed-end funds have replaced auction market preferred stock with alternative forms of structural and portfolio leverage, such as bank loans, lines of credit, tender option bonds, reverse repurchase agreements, puttable preferred shares, mandatory redeemable preferred shares, or extendible notes.

FIGURE 12Preferred Shares Constituted the Majority of Closed-End Fund Structural LeveragePercentage of closed-end fund structural leverage, year-end 2020

56%Preferred shares1

44%Other structural leverage²

Total closed-end fund structural leverage: $50.6 billion 1 A closed-end fund may issue preferred shares to raise additional capital, which can be used to purchase more securities for its portfolio.

Holders of preferred shares are paid dividends, but do not participate in the gains and losses on the fundʼs investments.2 Other structural leverage includes bank borrowing and other forms of debt.



FIGURE 13Closed-End Fund Preferred Share AssetsBillions of dollars, year-end

20202019201820172016201520142013201220112010

20202019201820172016201520142013201220112010

20202019201820172016201520142013201220112010

28282828282828272930 28

250224

249237235264254238215210

250

279252

277265263292282

265244239

279

26262625252626262727 26

145135142138138146142139121116146

171161168163163172168165148143

173

2 2233222 23 2

105891079997117112999394 104

10791

1091021001191141019697 106

Total closed-end fund assets

Bond closed-end fund assets

Equity closed-end fund assets

Common1Preferred2

1 All closed-end funds issue common stock (also known as common shares). 2 A closed-end fund may issue preferred shares to raise additional capital, which can be used to purchase more securities for its portfolio.

Holders of preferred shares are paid dividends, but do not participate in the gains and losses on the fundʼs investments.Source: Investment Company Institute


The vast majority (93 percent) of closed-end fund preferred share assets at year-end 2020 were floating-rate preferred shares (Figure 14). Puttable preferred shares, which include variable rate demand preferred shares, were 62 percent of closed-end fund preferred share assets; auction market preferred shares were 12 percent; and fixed-rate preferred shares accounted for 7 percent.

Portfolio LeveragePortfolio leverage is leverage that results from certain portfolio investments.24 Types of closed-end fund portfolio leverage include some types of derivatives, reverse repurchase agreements, and tender option bonds. At the end of 2020, 150 closed-end funds used portfolio leverage in the form of tender option bonds and reverse repurchase agreements as part of their investment strategy (Figure 11). Closed-end funds had $21.4 billion outstanding in reverse repurchase agreements and tender option bonds at year-end 2020 (Figure 15).

FIGURE 14Closed-End Fund Preferred Share Class Assets by TypePercentage of closed-end fund preferred share class assets, year-end 2020

Floating-rate 93Auction market preferred 12Puttable preferred 62Mandatory redeemable (floating) preferred 18

Fixed-rate 7Mandatory redeemable (fixed) preferred 3Perpetual (fixed) preferred 5


FIGURE 15Use of Portfolio LeverageBillions of dollars, end of period

2020:Q42020:Q32020:Q22020:Q1201920182017

10.510.89.4

8.18.68.19.3

11.010.510.010.210.710.0 10.6

Reverse repurchase agreementsTender option bonds

Note: Portfolio leverage is leverage that results from particular types of portfolio investments, including certain types of derivatives, reverse repurchase agreements, tender option bonds, and other investments or types of transactions. Data are only available for reverse repurchase agreements and tender options bonds. Given data collection constraints, and the continuing development of types of investments/transactions with a leverage characteristic (and the use of different definitions of leverage), actual portfolio leverage may be materially different than what is reflected above.Source: Investment Company Institute


Characteristics of Closed-End Fund InvestorsAn estimated 3.9 million US households owned closed-end funds in 2020.25 These households tended to include affluent investors who owned a range of equity and fixed-income investments. In 2020, 88 percent of households owning closed-end funds also owned

equity mutual funds, individual stocks, or variable annuities (Figure 16). Seventy percent of households that owned closed-end funds also held bond mutual funds, individual bonds, or fixed annuities. In addition, 38 percent of these households owned investment real estate.

FIGURE 16Closed-End Fund Investors Owned a Broad Range of InvestmentsPercentage of closed-end fund–owning households holding each type of investment, 2020

Equity mutual funds, individual stocks, or variable annuities (total) 88

Bond mutual funds, individual bonds, or fixed annuities (total) 70

Mutual funds (total) 77Equity 75

Bond 52

Hybrid 38Money market 55

Individual stocks 76

Individual bonds 33

Fixed or variable annuities 40

Investment real estate 38

Note: Multiple responses are included.Source: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey


Because a large number of households that owned closed-end funds also owned individual stocks and mutual funds, the characteristics of closed-end fund–owning households were similar in many respects to those of households owning individual stocks and mutual funds. For instance, households that owned closed-end funds (like households owning individual stocks and mutual funds) tended to be headed by college-educated individuals and tended to have household incomes above the national median (Figure 17).

Nonetheless, households that owned closed-end funds exhibited certain characteristics distinguishing them from households owning individual stocks and mutual funds. For example, although households with closed-end funds tended to have similar household financial assets as those owning individual stocks, they had greater household financial assets than households owning mutual funds (Figure 17). Also, 48 percent of individuals heading households that own closed-end funds were retired from their lifetime occupations, compared with 28 percent for those owning individual stocks and 23 percent for those owning mutual funds.

FIGURE 17Closed-End Fund Investors Had Above-Average Household Incomes and Financial Assets2020

All US Households

Households owning

closed-end funds

Households owning

mutual funds

Households owning

individual stocks

Median

Age of head of household1 52 54 50 51

Household income2 $65,000 $135,000 $105,000 $120,000Household financial assets3 $100,000 $500,000 $300,000 $467,000

Percentage of households

Household primary or co-decisionmaker for saving and investingMarried or living with a partner 55 66 69 69

College or postgraduate degree 38 56 56 59

Employed (full- or part-time) 59 56 75 71

Retired from lifetime occupation 30 48 23 28

Household ownsIRA(s) 37 71 65 67

DC retirement plan account(s) 49 58 87 75

1 Age is based on the sole or co-decisionmaker for household saving and investing.2 Total reported is household income before taxes in 2019.3 Household financial assets include assets in employer-sponsored retirement plans but exclude the household’s primary residence.

Source: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey


Additional Reading

» Closed-End Fund Resource Center www.ici.org/cef

» Frequently Asked Questions About Closed-End Funds and Their Use of Leverage www.ici.org/faqs/faq/other/faqs_closed_end

» A Guide to Closed-End Funds www.ici.org/cef/background/bro_g2_ce

» Quarterly Closed-End Fund Asset Data www.ici.org/research/stats/closedend

https://www.ici.org/cef

https://www.ici.org/faqs/faq/other/faqs_closed_end

https://www.ici.org/cef/background/bro_g2_ce

https://www.ici.org/research/stats/closedend


Notes1 “Interval” funds represent a small subset of closed-end

funds. These funds, under Rule 415 and Rule 486 under the Securities Act of 1933 and Rule 23c-3 under the Investment Company Act of 1940, may continuously offer their shares and make offers to repurchase shares at NAV at periodic intervals.

2 Section 18 of the Investment Company Act of 1940 provides that preferred shareholders, voting as a class, are entitled to elect at least two directors at all times and to vote along with common shareholders on the remaining directors. In addition, preferred shareholders, voting as a class, are entitled to elect a majority of the directors if at any time the dividends on the preferred shares are unpaid in an amount equal to two full years’ dividends on the preferred shares; they continue to be entitled to elect a majority of the directors until all dividends in arrears are paid.

3 For more information on closed-end fund premiums and discounts, see Lee, Shleifer, and Thaler 1991.

4 Specifically, these include Schedule 13D filings and Schedule 14A filings identified as “PREC14A,” or preliminary contested proxy solicitation filings.

5 Some filings downloaded from the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system were deleted from the final data set, including Schedule 13D filings by certain banks with no formal intent; Schedule 13D filings that appeared simply to be amendments to a previously filed Schedule 13D; Schedule 13D or PREC14A filings by affiliated persons; duplicate Schedule 13D or PREC14A filings made on the same day; and Schedule 13D and PREC14A filings that were duplicates of each other (i.e., their intent was assumed to be the same). Data may include a small number of Schedule 13D filings where shareholders did not disclose an activist intent.

6 For the purposes of this report, total assets are the fair value of assets held in closed-end fund portfolios funded by common and preferred shares less any liabilities (not including liabilities attributed to preferred shares). Total net assets are the assets of the fund available to common shareholders and are calculated for purposes of this report as total assets less the value of preferred shares. Total net assets of closed-end funds were $250 billion at year-end 2020.

7 The total return on US stocks is measured by the Wilshire 5000 Total Market Index; the total return on international stocks is measured by the MSCI All Country World Daily ex-US Total Return Index; the total return on US investment grade bonds is measured by the FTSE US Broad Investment Grade Bond Index; and the total return on US municipal bonds is measured by the Bloomberg Barclays Municipal Bond Total Return Index.

8 US stocks had an annualized total return of 13.8 percent during this period, as measured by the Wilshire 5000 Total Market Index.

9 US investment grade bonds had an annualized total return of 3.9 percent during this period, as measured by the FTSE US Broad Investment Grade Bond Index.

10 By comparison, the share of mutual fund and ETF total net assets managed by the 25 largest firms was 81 percent at year-end 2020. See Investment Company Institute 2021.

11 See Investment Company Institute 2021 for more information. The number of mutual funds includes mutual funds that invest primarily in other mutual funds. The number of ETFs includes ETFs not registered under the Investment Company Act of 1940 and ETFs that invest primarily in other ETFs.

12 See Cabral 2000 and US Department of Justice and the Federal Trade Commission 2010 for more information about the Herfindahl-Hirschman Index.

13 The mutual fund industry had a Herfindahl-Hirschman Index number of 772 as of December 2020. For additional discussion of the Herfindahl-Hirschman measure of mutual funds and other industries, see Stevens 2006.

14 In order to implement a managed distribution policy, a closed-end fund must apply for, and the SEC must provide an exemption from, Section 19(b) of the Investment Company Act of 1940 and Rule 19b-1 thereunder.

15 According to Morningstar data, 23 percent of traditional exchange-listed closed-end funds had managed distribution policies as of April 2021—the vast majority of which were in multi-strategy or equity-based closed-end funds.

16 For more information on dividend policy and discounts on closed-end funds, see Johnson, Lin, and Song 2006.

17 For more information on closed-end fund distributions, see Gabelli Funds, LLC 2004 and Nuveen Investments, “Understanding Managed Distributions.”

18 For more information on MLPs, see Tortoise Capital Advisors 2018.

19 For additional information, see Investment Company Institute, “Frequently Asked Questions About Closed-End Funds and Their Use of Leverage.”

20 More closed-end funds may be using portfolio leverage, but data are available only on the use of reverse repurchase agreements and tender option bonds. Portfolio leverage is leverage that results from particular types of portfolio investments, including certain types of derivatives, reverse repurchase agreements, tender option bonds, and other investments or types of transactions.


21 For more information on the different types of closed-end fund preferred shares, see Investment Company Institute, “Frequently Asked Questions About Closed-End Funds and Their Use of Leverage.”

22 The leverage ratio is the ratio of the amount of structural leverage to the sum of the amount of common share assets and structural leverage.

23 See, e.g., Galley 2010 and Investment Company Institute, “Frequently Asked Questions About Closed-End Funds and Their Use of Leverage.”

24 For more information on the types of closed-end fund leverage, see Nuveen Investments, “Understanding Leverage in Closed-End Funds.”

25 The Investment Company Institute conducts the Annual Mutual Fund Shareholder Tracking Survey each year to gather information on the demographic and financial

characteristics of mutual fund–owning households in the United States. The most recent survey was conducted from May to June 2020 and was based on a dual-frame telephone sample of 3,001 randomly selected US households. Of these, 1,350 households were from a landline random digit dial (RDD) frame and 1,651 households were from a cell phone RDD frame. All interviews were conducted with the investment decisionmaker, the person most knowledgeable about the household’s savings and investments. For additional information on the incidence of closed-end fund ownership across mutual fund–owning households by various demographic and financial characteristics, see Schrass and Bogdan 2021. For additional information on the Annual Mutual Fund Shareholder Tracking Survey, see Holden, Schrass, and Bogdan 2020.


ReferencesCabral, Luis M. B. 2000. Introduction to Industrial Organization. Cambridge, MA: MIT Press.

Gabelli Funds, LLC. 2004. “Closed-End Funds Managed Distribution Policy” (June). Available at www.gabelli.com/Gab_pdf/articles/clef_200604.pdf.

Galley, Patrick W. 2010. “Finding Value in the ARS Wreckage.” InvestmentNews (July 27).

Holden, Sarah, Daniel Schrass, and Michael Bogdan. 2020. “Ownership of Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2020.” ICI Research Perspective 26, no. 8 (November). Available at www.ici.org/pdf/per26-08.pdf.

Investment Company Institute. “Frequently Asked Questions About Closed-End Funds and Their Use of Leverage.” Available at www.ici.org/faqs/faq/other/faqs_closed_end.

Investment Company Institute. 2021. 2021 Investment Company Fact Book: A Review of Trends and Activities in the Investment Company Industry. Washington, DC: Investment Company Institute. Available at www.icifactbook.org.

Johnson, Shane, Ji-Chai Lin, and Kyojik Song. 2006. “Dividend Policy, Signaling, and Discounts on Closed-End Funds.” Journal of Financial Economics 81, no. 3: 539–562.

Lee, Charles, Andrei Shleifer, and Richard Thaler. 1991. “Investor Sentiment and the Closed-End Fund Puzzle.” Journal of Finance 46, no. 1: 75–109.

Nuveen Investments. “Understanding Leverage in Closed-End Funds.” Available at www.nuveen.com/en-us/insights/closed-end-funds/understanding-leverage.

Nuveen Investments. “Understanding Managed Distributions.” Available at https://documents.nuveen.com/Documents/Nuveen/Default.aspx?fileId=64935.

Schrass, Daniel, and Michael Bogdan. 2021. “Profile of Mutual Fund Shareholders, 2020.” ICI Research Report (January). Washington, DC: Investment Company Institute. Available at www.ici.org/pdf/ 20_rpt_profiles.pdf.

Stevens, Paul Schott. 2006. “The Success of America’s Mutual Fund Marketplace: Benefiting Fund Investors.” Presentation at AEI/Brookings Forum, Washington, DC. Available at www.ici.org/speeches-opinions/06_aei_stevens_remarks.

Tortoise Capital Advisors. 2018. “The ABCs of MLPs: Making Sense of Taxes.” Available at https://tortoiseecofin.com/media/2581/ the-abcs-of-mlps_053018.pdf.

US Department of Justice and the Federal Trade Commission. 2010. Horizontal Merger Guidelines. Washington, DC: US Department of Justice and the Federal Trade Commission (revised: August 19, 2010). Available at www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf.

https://www.gabelli.com/Gab_pdf/articles/clef_200604.pdf

https://www.ici.org/pdf/per26-08.pdf



https://www.icifactbook.org

https://www.nuveen.com/en-us/insights/closed-end-funds/understanding-leverage

https://www.nuveen.com/en-us/insights/closed-end-funds/understanding-leverage

https://documents.nuveen.com/Documents/Nuveen/Default.aspx?fileId=64935

https://documents.nuveen.com/Documents/Nuveen/Default.aspx?fileId=64935

https://www.ici.org/pdf/20_rpt_profiles.pdf

https://www.ici.org/pdf/20_rpt_profiles.pdf

https://www.ici.org/speeches-opinions/06_aei_stevens_remarks

https://tortoiseecofin.com/media/2581/the-abcs-of-mlps_053018.pdf

https://tortoiseecofin.com/media/2581/the-abcs-of-mlps_053018.pdf

https://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf

https://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf

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The Investment Company Institute (ICI) is the leading association of regulated funds globally, including mutual funds, exchange-traded funds (ETFs), closed-end funds, and unit investment trusts (UITs) in the United States, and similar funds offered to investors in jurisdictions worldwide. ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers.

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James DuvallJames Duvall is an economist in the industry and financial analysis section of ICI’s research department. Since joining in 2012, Duvall has primarily participated in research examining US mutual fund fees across the industry and in retirement plans, and more recently, the costs and charges of UCITS. He also contributes to research on closed-end funds and worldwide regulated funds. He graduated from Virginia Tech with a BS in mathematics and a BA in economics and holds a master’s degree in computer science from Johns Hopkins University.